A hub strategy may work well when you are transporting business travellers but it may not be as efficient of cost effective for the leisure market, writes guest columnist and pricing specialist, Tom Bacon

The Caribbean has among the most beautiful beaches in the world.  And for decades American Airlines was the largest airline in the Caribbean, transporting more passengers to these picturesque beaches than any other airline.  Recently, however, American formally announced the elimination of its San Juan hub, which had been the basis for its dominance in the region.

Unpicking American’s strategy

American’s strategy in the Caribbean was not much different from their strategy in Dallas, Fort Worth, Chicago or the now abandoned Raleigh Durham.  They flew planes into the hub (San Juan) from various destinations across the US to connect to various other destinations (the islands of the Caribbean).  The San Juan hub allowed American to serve 20+ cities in the US to 15+ cities in the Caribbean (>300 O&Ds) with a daily service.  American dominated service into most of the islands; and they dominated Caribbean service in the US with such broad coverage across the islands.

Many of the islands were served from San Juan with smaller turboprop aircraft (branded ‘American Eagle’ or ‘Executive Airlines’), which operated efficiently on the shorter haul flights and matched demand to the smaller islands better than larger aircraft.

Flaws in the leisure hub

US domestic hubs, however, have been primarily built around business customers.  The hub allows airlines to serve smaller O&D’s with more frequency.  American can fill the five flights a day from Tulsa to DFW with passengers travelling beyond DFW to points across the US – and, in fact, across the globe. Business travellers travelling in the smaller O&D’s appreciate the convenience - and generally pay higher fares for this frequent service and easy connections.  However, since hubs are more costly to operate than point-to-point service (including peaking of manpower and facilities and the cost of transferring bags across flights), airlines need the higher fares of business passengers to breakeven.

Obviously, this model doesn’t work well if the passenger is a leisure passenger – not excited about paying for high frequency – or most other airline conveniences.  For many leisure passengers, price is the most important factor in their purchase decisions. Filling an airplane with such low yield leisure travellers, however, can drive a breakeven load factor above 100% - the airline will lose money even if they fill every seat.  And the travellers are less loyal - they may well gravitate to a competitive non-stop service even if it operates only three times a week.

The new leisure paradigm; focusing on point-to-point service

With American’s elimination of its San Juan hub, JetBlue is now larger in the US to San Juan than American – in March, in fact, JetBlue operates almost double the departures from the US to San Juan that American does.  But, in some sense, that isn’t the point.  With neither American nor JetBlue operating San Juan like a hub, service to the Caribbean no longer relies so heavily on San Juan.  American now focuses its service to the Caribbean via its US hubs or focus cities, including Miami, New York’s JFK, Dallas/Fort Worth and Chicago.  JetBlue operates from JFK (where it now serves twice as many Caribbean destinations with three times as much frequency as American); but also from Boston, Orlando, Fort Lauderdale, Palm Beach, Newark, White Plains and Jacksonville – all without the large connecting network that American used to enjoy in San Juan.  JetBlue is obviously focusing more on point-to-point traffic, a far more economic way to serve disproportionately leisure destinations.

Losing the leisure hubs

San Juan is not alone in this restructuring of leisure hubs.  USAirways’ hub at Las Vegas, where it had dominated the airport for decades, was eliminated in 2009; USAirways now only serves Las Vegas from its other US hubs.  Southwest, with its more point-to-point strategy, is now by far the largest carrier at Las Vegas today, with 206 daily departures, almost half of total operations at the airport.  Southwest serves 53 destinations across the US, not at all focused serving only ‘hub’ airports (Delta, the largest carrier in the US now but very focused on its hubs, serves only nine destinations out of Las Vegas). 

Interestingly, Allegiant serves almost as many destinations out of Las Vegas as Southwest – but with less than 15% as many daily departures.  Again, a leisure-oriented airline operation succeeds best with an emphasis on point-to-point service.   And it need not offer the greatest frequency – it is not even necessary to offer a daily service.  Spirit Airlines, too, has grown an operation in Las Vegas with its point-to-point strategy, now offering almost as many daily operations as Allegiant.  Las Vegas, like the Caribbean, is now dominated by a more point-to-point airline strategy.

The last word

The hub strategy remains the overriding focus of the largest US legacy carriers – American, Delta, United, and USAirways.  However, the hub strategy – with its higher cost of operation - does not work as well in primarily leisure-oriented hub locations.  Hub strategies are more successful in business-oriented markets where customers value frequency.  American, in its restructuring, has announced elimination of its San Juan hub and has pulled back its Caribbean service overall to service from its US hubs, each of which, as a hub, has a higher business component than the Caribbean.  And more service to the Caribbean is now provided via point-to-point service from JetBlue and others. 

American’s pullback is similar to USAirways’ 2009 elimination of its Las Vegas hub – yielding the market to carriers with strategies more suitable to the higher leisure mix of passengers in these regions.  It seems that travellers to the wonderful beaches of the Caribbean will get there in a different way than before.

Tom Bacon is a former executive at American Airlines and Frontier Airlines and is currently chief executive of airline consulting firm, Revenue Optimization.  He has specialised in pricing and profitability management for airline-related companies for more than 30 years.  Please send questions to tom.bacon@yahoo.com.